What upcoming policy changes might impact Scope 3 reporting?

Introduction

Emissions disclosure has become an increasingly important topic amongst consumers and practitioners in the corporate world. In response to growing pressure from stakeholders, governments worldwide are starting to take action by implementing new policies and regulations that will require more mandatory reporting of Scope 3 emissions. In this article, we will explore some of the key policy changes that companies should be aware of.

SFDR (EU)

The EU has added clarifications to the SFDR (Sustainable Finance Disclosure Regulation) framework, which have applied since the 1st of January 2023, covering the next filing date of the 30th of June 2023.
Any financial products marketed as sustainable must be classified as either partially sustainable or fully sustainable. Both classifications require disclosure of 14 PAI indicators (metric-based answers that outline the environmental and societal impacts of investments). One of these metrics is Scope 3 (category 15) carbon emissions, which will include your share of the emissions generated from your portfolio companies’ operations.
Since investments that fail to comply will begin to stick out, incorporating meaningful climate action across portfolios will become an increasingly valuable competitive edge.

CRFD (UK)

The CRFD (Climate Related Financial Disclosures) outlines that eight disclosures must be made relating to the organisation’s climate-related risks and opportunities. These disclosures should include the following:

1. What they are
2. How they’re handled at a governance level
3. How they’re assessed practically
4. How they’re integrated into overall risk management
5. What their actual and potential impacts are on the organisation
6. How resilient is the organisation in various climate scenarios
7. Which broad targets are used to manage the risks and realise the opportunitiesWhich KPIs are used to assess
8. progress against these targets

Although there is no requirement to disclose carbon emissions, all organisations reporting under CRFD will also be reporting under SECR (which already requires some mandatory disclosure of elements of Scope 3). As targets and KPIs that reference points 7 and 8 will increasingly involve reductions to Scope 3 emissions, it is recommended that you begin to measure and include this extra data before it becomes mandated. It must be noted that the CRFD will apply to the accounting periods that started on or after the 6th of April 2022, i.e., all annual reports in 2023 and onwards.

DWP (UK)

The DWP’s (Department for Work and Pensions) programme outlines that trustees of covered pension funds will soon have to publish an annual report. An integral section of this report will include ‘metrics and targets’ which will require trustees to calculate:

1. The financed emissions (Scope 3 category 15) of their fund.
2. Their absolute emissions.
3. Their emissions intensity which will contextualise the absolute emissions.
4. One additional climate change metric.

Trustees can exclude financed emissions (Scope 3) from their first reporting year. However, they are encouraged to measure and report the elements of financed emissions that are determined to be material.

FCA (UK)

In July 2022, the FCA published a review of the first TCFD reporting from covered firms, in which the FCA demanded far more detailed reporting. Although the FCA has been relatively forgiving towards early attempts at disclosure, they have indicated a shift toward a stricter stance in the future.

The FCA has also outlined different rules for three distinct practitioners:

1. Standard listed firms must now include Scope 3 emissions unless such emissions are judged to be immaterial. This is applicable for all reports in 2023 and thereafter.
2. Premium listed firms will also be required to include all material Scope 3 emissions.
3. Asset managers and owners will not have to include Scope 3 ‘financed emissions’ until 2024 filings.

The requirements of the FCA are being progressively extended to cover smaller firms on a yearly basis. By the 30th of June 2024, managers and owners possessing assets worth £5 million or more are obligated to disclose Scope 3 emissions. However, the FCA recommends that they do so in their 2023 emissions reporting.

Carbon Responsible has previously covered the future changes to policy that will impact disclosure of emissions here.

Summary

SFDR (EU): The EU has added additional clarifications to the SFDR, covering the next filing date of the 30th of June 2023 and onwards. These new rules require firms to disclose the Scope 3 category 15 ‘investments’ which relates to the share of emissions that are generated from the operations of their portfolio companies.

CRFD (UK): The CRFD outlines that eight disclosures must be made around climate-related risks. All organisations reporting under CRFD will also be reporting under SECR (which requires some mandatory disclosure of Scope 3). As targets and KPIs relating to the disclosures made under CRFD increasingly involve reductions to Scope 3 emissions it is recommended that firms begin to measure and include extra data before it becomes mandated.

DWP (UK): The DWP has outlined that, in annual reports, trustees must include the financed emissions of their fund (Scope 3 category 15), their absolute emissions, emissions intensity metrics, and one additional climate change metric.

FCA (UK): The FCA has begun a shift toward holding a much stricter stance on future efforts of disclosure. THE FCA has outlined the following rules for three distinct practitioners:

1. Standard listed firms must now include Scope 3 emissions.
2. Premium listed firms must include Scope 3 emissions.
3. Asset managers and owners will have to include ‘financed emissions’ (Scope 3 category 15) by their 2024 filings.